A Presentation on ACCOUNTING STANDARDS 17 th JUN 2018 -CA Rishi K - - PowerPoint PPT Presentation

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A Presentation on

ACCOUNTING STANDARDS

17th JUN 2018

• CA Rishi K Agrawal

Agra M.No. 9027488853,9219889904

7/17/2018

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AS- 1 Disclosure of Accounting Policies AS- 2 Valuation of Inventories AS- 4 Contingencies and Events occurring after the Balance Sheet Date AS- 5 Net Profit or Loss for the period, prior period items and changes in accounting policies

AS- 1: Disclosure of Accounting Policies

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AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• To

promote better understanding

• f

financial statements through – disclosure of Significant accounting policies and – the manner in which such policies should be disclosed.

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Object of the Standard :-

AS-1

DISCLOSURE OF ACCOUNTING POLICIES ACCOUNTING POLICY - Meaning:-

• Specific accounting principles and
• Methods of applying those principles.

adopted by the enterprise in the preparation and presentation of financial statements.

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AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• Accounting Policy selected should represent true

and fair view of state of affairs of the enterprises and Profit or loss of the period and also contain the following three elements:- – Prudence – Substance over Form e.g Sale and Buy Back, Interest Ballooning, Interest in case of Zero Coupon Bond, Total Return Swap etc. – Materiality

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MAJOR RECOMMENDATIONS:-

AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• All significant accounting policies adopted in

the preparation and presentation of financial statements should be disclosed and disclosure should be done, so far as possible, at one place.

(All these policies are shown in the notes to accounts.)

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MAJOR RECOMMENDATIONS:-

AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• The disclosure should form part of the

financial statements.

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MAJOR RECOMMENDATIONS:-

AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• In case of change in accounting policy, its disclosure is

required, if such change has material effect in the current year or is expected to have material effect in future periods.

• Also Disclose the financial effect of such change on

Profitability and financial position of enterprise.

• If amount is not ascertainable, wholly or in part, the fact of

non-ascertainment should also be disclosed.

[Note :- As per AS-5, The effect of such change should be a part of the profit or loss of period under consideration and the change should be applied normally prospectively]

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MAJOR RECOMMENDATIONS:-

AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• There is no need to disclose fundamental

accounting assumptions, if they are followed. These assumptions are as under:-

– Going Concern – Consistency – Accruality also known as mercantile concept [based

• n matching principle of accounting]
• In

case

• f

violation

• f

any

• f

above assumptions, a specific disclosure is required

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MAJOR RECOMMENDATIONS:-

AS-1

DISCLOSURE OF ACCOUNTING POLICIES The disclosure

• f

wrong accounting treatment is not remedy.

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MAJOR RECOMMENDATIONS:-

AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• Cash V. Accrual System:- Sec 128(1) of the

Companies Act 2013 also required use of accrual basis accounting and double entry system in the preparation and presentation of financial statements as

• ne
• f

the pre conditions for truth and fairness of such

• statements. Accordingly, there is no option

available to corporate management to finalise accounts on cash basis.

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AS – 1 V COMPANIES ACT

AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• BOD Report:- U/s 134 (3)(c) read with sec 134(5) of the Act,

the directors have to give a responsibility statement in its report to the effect that they have selected such accounting policies and applied them consistently and made such judgments and estimates as are reasonable and prudent, so as to give a true and fair view of the State of Affairs of the Company at the end of the financial year and of the Profit or Loss of the company for that period and the accounts have been prepared as per Going Concern approach. AS-1 does not require such type of disclosure neither in BOD Report not in AFS.

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AS – 1 V COMPANIES ACT

AS-1

DISCLOSURE OF ACCOUNTING POLICIES

• a statement of compliance with AS followed and exemptions availed;
• a summary of significant accounting policies applied, including:

– the measurement basis (or bases) used in preparing the financial statements; and – the other accounting policies used that are relevant to an understanding of the financial statements.

• Supporting information for items presented in the balance sheet, Statement
• f Profit and Loss and of cash flows, in the order in which each statement

and each line item is presented; and

• other disclosures, including:

– contingent liabilities and unrecognised contractual commitments; and – Non-financial disclosures, such as the entity's foreign currency risk management

• bjectives and policies.

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Order of Presentation in “Notes to Accounts”

AS- 2:- VALUATION OF INVENTORIES

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AS-2: VALUATION OF INVENTORIES

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WIP covered by AS-7 WIP arising in the ordinary course of business of service providers. Shares, debentures etc. held as stock in trade. Producer’s inventories of livestock, agricultural and forest products and mineral oils, ores and gases to the extent that they are measured at NRV in accordance with well established practice in those industries

NON APPLICABILITY:-

AS-2: VALUATION OF INVENTORIES

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• held for sale in the ordinary course of business i.e.

Finished goods and trading goods.

• In the process of production for such sale i.e. WIP.
• In the form of materials or supplies to be

consumed in the production process or in the rendering of services i.e. raw materials, spare parts, consumable stores and loose tools etc. Inventories are assets

INVENTORIES- Meaning:-

AS-2: VALUATION OF INVENTORIES

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• Sale Value – Expected selling cost.

FINISHED GOODS, TRADING GOODS & RAW MATERIALS:

• Sales Value – Expected selling cost –

Expected further cost of completion.

FOR WIP :

• If inventory is held to satisfy “Firm Sales [forward

sales]”, the NRV should be based on the contract price.

• If inventory is not covered under forward agreement,

NRV should be based on general selling Price.

Notes:

NRV- Meaning:-

AS-2: VALUATION OF INVENTORIES

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Finished goods and WIP :- Lower of Cost and NRV. [Comparison will be done on individual basis

• r category basis but not on global basis.]

MEASUREMENT OF INVENTORIES :-

AS-2: VALUATION OF INVENTORIES

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Raw Materials

• etc. :-

Normally at cost. Valued at NRV, if both conditions are satisfied:-

• NRV of RM < Cost of RM
• Expected NRV of Finished

goods to be produced from such RM < Expected COP of Such finished goods.

MEASUREMENT OF INVENTORIES :-

AS-2: VALUATION OF INVENTORIES

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Cost of Purchase Conversion Cost Cost incurred in bringing the inventory to its present condition and location.

MEASUREMENT OF COST OF INVENTORIES :-

AS-2: VALUATION OF INVENTORIES

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COST OF PURCHASE :-

It covers

Purchase price, duties, taxes, freight inwards &

• ther exps. directly incurred

in connection with purchase

It excludes

Trade discount, rebates, duty drawbacks and the

• exps. subsequently

recoverable e.g. ITC of GST.

AS-2: VALUATION OF INVENTORIES

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CONVERSION COST:-

Labour Overheads

Factory Overheads

• Adm. Overheads

connection with Production.

AS-2: VALUATION OF INVENTORIES

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CONVERSION COST:-

Variable cost

VC/unit directly considered

Fixed cost

FC/unit decided as under: Total Fixed Cost

• Higher of normal and actual Output.

AS-2: VALUATION OF INVENTORIES

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COST OF INVENTORIES–Limit on Overheads:-

• Cost incurred in bringing the inventories to its

present conditions and locations.

• E.g. the cost of “designing of product” to meet

the specific requirement of a customer.

AS-2: VALUATION OF INVENTORIES

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COST TECHNIQUE :-

• Marginal

Costing

Not allowed

• Absorption

Costing.

Allowed

AS-2: VALUATION OF INVENTORIES

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JOINT PRODUCTS & BY PRODUCTS:-

• Joint cost can be apportioned on the basis of

reasonable and rational methods as permitted in cost accounting e.g.

– Reverse cost method. – Sales Value at split off Point Method etc.

AS-2: VALUATION OF INVENTORIES

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EXCLUSION FROM COST:-

Abnormal losses. Storing cost unless it is necessary in the production process prior to a further processing. Administration

• verheads not

connected with production. Selling and distribution

• verheads.

Interest and other borrowing cost unless required by AS-16. Demurrage or detention charges, or penalty levied by transport or

• ther authorities [CAS 6;

Para 5.1.8]

AS-2: VALUATION OF INVENTORIES

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COST FORMULA ALLOWED:-

Specific Identification Method FIFO Weighted Average Method-Periodical or Continuous (both are allowed). Standard Price Method – If purchase price is more or less stable. Adjusted selling price method - only permitted for retailers Replacement cost Method – When RM is to valued at NRV. Note:- LIFO is not allowed.

AS-2: VALUATION OF INVENTORIES

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DISCLOSURE REQUIREMENTS:-

• Accounting policies adopted in measuring inventories, including cost

formula used.

• Total carrying amount of inventory in appropriate classification. Until
• therwise specified, following classification may be adopted:

– Raw materials and Components, – Work in progress, – Finished goods, – Stock in trade, – Stores and spares, – loose tools, – Others

AS-2: VALUATION OF INVENTORIES

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AS-2 V. COMPANIES ACT, 2013

Common classification

• f

inventory in the Balance sheet as per AS-2 is

• Raw materials and

Components,

• Work in progress,
• Finished goods,
• Stock in trade,
• Stores and spares,
• loose tools,
• Others

However, as per Schedule III, common classification

• f

inventory in the Balance sheet is:-

• Raw materials,
• Work in progress,
• Finished goods,
• Stock in trade,
• Stores and spares,
• loose tools,
• Others
• Goods in Transit shall be

disclosed separately.

AS-4: CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

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AS-4: Contingencies and Events occurring after the Balance Sheet Date

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• Contingencies arising to insurance companies on

account of insurance contracts.

• Contingencies arising under long term lease contracts

as it is covered by AS-19.

• Contingencies arising under retirement benefits plans.
• All contingencies and provisions relating to liabilities on

account of issuance of AS-29.

• All contingencies and provisions relating to assets

covered specifically by other standards like AS-28.

NON APPLICABILITY:-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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• Contingency

is a situation

• r

condition ultimate

• utcome
• f

which whether favourable or unfavourable is not certain and depends on the occurrence or non occurrence

• f some uncertain future events.

CONTINGENCIES  Meaning :-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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• The events which occur after the date of

Balance sheet but before the date of final approval by BOD in case of companies and any

• ther governing body in case of non corporate

enterprises.

EVENTS OCCURING AFTER BALANCE SHEET DATE  Meaning:-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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• Only Contingencies for loss in Financial Assets

is covered in AS-4 e.g. PBD.

• Create Provision for expected loss in Financial

Assets if

– It is probable [even after considering probable recovery] that asset is impaired – A reasonable estimate of loss is possible.

Accounting for Contingencies:-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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Belonging to contingencies Existing

• n B/S date

Its effect taken on B/S Others Routine Events No Accounting & disclosure & will be shown in next B/S Non Routine Events Going Concern Assumption Fails Its Effect taken on B/S Others Material Disclose in BOD Report in CY and accounting effect considered in NY. Immaterial No Accounting & disclosure & will be shown in next B/S.

Events occurring after the B/S date :-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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• Disclosure if required in the balance sheet will

contain the following information:

– Nature of contingency – Uncertainty leading to contingency – Its financial estimate or a statement that such estimate can not be made.

DISCLOSURE REQUIREMENTS:-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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• Disclosure if required in the BOD Report will

contain the following information:

– Nature of Event – Its financial estimate or a statement that such estimate can not be made.

DISCLOSURE REQUIREMENTS:-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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• Para 14 of AS 4 requires to disclose dividend,

declared after balance sheet date but before the financial statements are approved for issue, in notes on accounts and does not require the adjustment in the financial statements unless the statute requires

• therwise.

DISCLOSURE REQUIREMENTS-Proposed Dividend :-

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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Material events and commitments occurring after the Balance sheet Date Sec 134 (3)(l) also requires that the material events and commitments occurring after the Balance sheet Date to the date of Directors Report which may affect the financial position of the company is required to be disclosed in BOD Report. Thus AS 4 and Companies Act are not contradictory on this front.

AS-4 V COMPANIES ACT

AS-4: Contingencies and Events occurring after the Balance Sheet Date

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Dividend Proposed Schedule III requires to disclose proposed dividend in notes on accounts and does not require the adjustment in the financial

• statements. Only disclosure in Notes to Accounts are required.

Moreover, Sec 134 (3) (k) requires the proposed divided also to be shown in BOD Report. Thus AS 4 and Companies Act are not contradictory on this front.

AS-4 V COMPANIES ACT

AS-5: NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES

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AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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Profit and Loss Account Profit/Loss from Ordinary activities Profit/loss from Extra- ordinary activities Separate disclosure required for

Prior Period Items Change in Accounting Estimates Change in Accounting Policies

Option I –Above the line Above the line Above the line Option II –Below the line.

MAJOR RECOMMENDATIONS

AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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• ORDINARY ACTIVITIES:- Operating Activities + other normal
• perating activities + all incidental activities from such

activities e.g. purchase of fixed assets , disposal of fixed assets in the normal course etc. These activities may be recurring or non recurring.

• EXTRA ORDINARY ACTIVITIES:- All activities other than
• rdinary activities are extra ordinary activities. These are of

non recurring nature e.g. loss by accident, fire, earthquake etc.

ORDINARY V EXTRA ORDINARY ACTIVITIES

AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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PRIOR PERIOD ITEMS : These are the income or exps. which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

PRIOR PERIOD ITEMS V CHAING IN ESTIMATES

AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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As per paras 12 and 14 of the standard, if there is any non recurring transaction or a transaction of material nature under

• rdinary activity heading, its separate disclosure is also required

in P & L Account. E.g.

• Profit/Loss on sale of fixed assets and long term investments,
• Litigation settlement,
• Restructuring cost,
• Write down of inventory value to NRV or their reversal etc

SEPARATE DIS. IN ORDINARY ACTIVITIES

AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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• Change in law,
• Change in pronouncement of ICAI or
• For better true and fair view.

Change in Policy when permitted

AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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• Adoption of New policy for new transaction or event will not

amount to change in the policy.

Adoption V Change

AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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• There is no conflict between AS-5 and the Companies Act
• 2013. Even Schedule III also requires the separate disclosure

the extraordinary items separately in the Statement of Profit and Loss so as to have a clear idea about the working results

• f the company.

AS -5 v COMPANIES ACT

AS – 5: Net Profit or Loss for the period, prior period items and changes in accounting policies

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• Since the format of the profit and loss account of banks

prescribed in Form B under Third Schedule to the Banking Regulation Act 1949 does not specifically provide for disclosure of the impact of prior period items on the current year’s profit and loss, such disclosures, wherever warranted, may be made in the ‘Notes to Accounts’ to the balance sheet

• f banks.

AS -5 v RBI Guidelines

THANKS

7/17/2018